How well does sticky information explain the dynamics of inflation, output, and real wages?

Abstract

This paper finds that a model with sticky information is less successful than a standard model featuring nominal rigidities, inflation indexation, and habits in generating the dynamics triggered by technology shocks, as estimated by a vector autoregression using U.S. macroeconomic data. The real wage responses after a permanent increase in productivity clearly favor the standard model. The sticky information model fails to replicate the observed inertial response in the real wage, whereas the standard model relies on inflation indexation in wage-setting to achieve a better fit. The two models are, however, statistically equivalent after a shock in monetary policy.